Snowball vs. Avalanche
The two most popular payoff strategies both keep all minimum payments current and apply any extra to one focus debt at a time. They differ on which debt to focus on first.
- Avalanche ??focus on the debt with the highest interest rate. Mathematically optimal: produces the least total interest and (usually) the fastest payoff.
- Snowball ??focus on the debt with the smallest balance. Slightly more interest paid overall, but the quick "win" of knocking out a debt early provides momentum that helps many people stay on the plan.[1]
When the gap between methods is small, snowball is often the better behavioral choice. When the gap is large (you have one debt with a much higher APR), avalanche meaningfully outperforms.
Why Extra Payments Matter So Much
Minimum credit-card payments are typically set at 1??% of the balance, much of which goes to interest. At 22% APR, a $5,000 balance with 2% minimums takes roughly 25 years to pay off and costs around $10,000 in interest. An extra $200/month brings that down to about 2 years and a few hundred dollars in interest.
Cascading the Focus Payment
When one debt is paid off, both methods roll its minimum payment plus the extra into the next focus debt. The total monthly payment stays constant; what changes is where it goes. This cascading effect is what produces the "snowball" ??payments grow as debts are eliminated.
Things This Calculator Doesn't Model
- Variable APRs (most credit cards) ??assumes the rate you enter is constant.
- Promotional 0% balance transfer offers ??model these by lowering the rate to 0 for the promo period.
- Late fees, returned-payment fees, over-limit fees.
- New charges to existing accounts.
- Tax-deductible interest (e.g., mortgage, some student loans).
References
[1] Gal, D. & McShane, B. (2012). "Can Small Victories Help Win the War?" Journal of Marketing Research ??empirical support for the behavioral snowball effect.